Markets & Finance

Wal-Mart's Urban Renewal

It looks like Wal-Mart might be moving beyond the rural. On Apr. 4, the company announced plans to build stores in distressed urban areas. That may do something to help its beleaguered image, and experts say it makes good business sense as well, because major retailers have long avoided those markets. That means Wal-Mart (WMT) will face less competition from rivals in them.

"A large number of urban areas are poorly serviced by retailers," says Edward Weller, a retail analyst at ThinkEquity Partners. "Wal-Mart could do a lot of business while doing those communities a lot of good."

In its latest effort to silence critics of its business practices, CEO Lee Scott announced that over the next two years Wal-Mart will open 50 stores in economically distressed parts of metropolitan areas. Those stores, the retailer claims, will create 15,000 to 25,000 new jobs (see BW, 11/7/05, "Wal-Mart: A Case For the Defense, Sort Of").

COMMUNITY PARTNERSHIPS. In addition, Wal-Mart said it would designate 10 of those markets as "Wal-Mart Jobs & Opportunity Zones," where the retailer will provide assistance to businesses in those communities. This would include running seminars on how best to do business with Wal-Mart, and featuring area companies in local newspaper advertisements and on its in-store radio network. It would also include working with and making contributions to local chambers of commerce to develop programs to help area businesses.

In all, a Wal-Mart spokeswoman said the company would donate $1.5 million in cash and free advertising in those 10 communities and could look to eventually expand the program. "We can be better for communities than we have in the past," Scott said in a telephone interview with a group of journalists. "Better for both of us."

The announcement came as Wal-Mart has come under increased criticism on a variety of fronts, from paying low wages and providing paltry health benefits to hurting local businesses and causing sprawl. Such criticism has escalated over the last year, as two union-backed groups have run grass-roots campaigns to draw attention to Wal-Mart. Analysts say the negative perceptions have slowed sales, as some shoppers turn away from the retailer. Meanwhile, Wal-Mart faces increasing local opposition to new stores.

A SOFTER IMAGE. Indeed, Scott announced the urban plan at the site of a store under construction in Chicago, a city where Wal-Mart has faced strong opposition. Wal-Mart proposed two stores in the city in 2004, only narrowly getting approval for the one in the lower-income neighborhood on the West Side. Scott selected the Chicago neighborhood to be the first of Wal-Mart's 10 Opportunity Zones. The company didn't disclose the other zones, saying they would be announced in the future.

The move is part of a large effort Wal-Mart has made to soften its image. It has tweaked its health insurance so more employees can afford it, and announced initiatives to make its stores more environmentally friendly. Scott has also sought more of a dialogue with critics -- except the unions, which the company opposes (see BW, 2/13/06, "No Union Please, We're Wal-Mart").

Wal-Mart also disclosed Apr. 4 that despite protests from a national Christian organization, it would start selling DVDs of Brokeback Mountain, a film about a love affair between two gay cowboys. The retailer has long excluded entertainment it deems objectionable from its stores (see BW, 12/14/05 "The Media Hears the Sermon").

LIFE SUCKER? Of all the steps Wal-Mart has taken, however, image experts say opening stores in poorer neighborhoods could be the most fruitful. That's because most major retailers have continued to ignore those markets, says Chris Ohlinger, chief executive of SIRS Inc., a research firm that tracks consumer attitudes towards retailers. "It's the only part of the United States that needs more retail. It's a great move."

Adam Hanft, chief executive of Hanft Unlimited, a New York brand consulting firm, agrees. Opening urban stores is far more tangible to shoppers than health insurance or the environment, making the move much like Wal-Mart's Hurricane Katrina relief efforts for which it was broadly praised, he says. And, Hanft adds, it addresses squarely one of the central criticisms of Wal-Mart: "That it sucks the life out of communities."

Because of the lack of competition, analysts say, the inner-city stores could prove just as profitable as Wal-Mart's other stores, in addition to building goodwill and being easier to locate. Scott acknowledged as much in the telephone interview. "We are not looking for diminished returns," he said.

How effective the urban stores ultimately are in shaping Wal-Mart's image may depend on how well it executes the plan, says Stan Bratskeir, chief executive of Bratskeir & Co., a New York public-relations firm. Indeed, the company left out many specifics from the announcement. Still, it's clear that Wal-Mart's charm offensive has taken a new angle of attack, and it's aimed at downtown.